Systemically important financial institution

This article is about banks, insurance companies and financial market infrastructure providers deemed systemically important by the FSB. For a listing of the banks, see list of systemically important banks.
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A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as "too big to fail".[1]

As the financial crisis of 2007–2008 unfolded, the international community moved to protect the global financial system through preventing the failure of SIFIs, or, if one did fail, limiting the adverse effects of its failure.[2][3][4] In November 2011, the Financial Stability Board (FSB) published a list of global systemically important financial institutions (G-SIFIs).[5]

In November 2010, the Basel Committee on Banking Supervision (BCBS) introduced new guidance (known as Basel III) that also specifically target SIFIs. The focus of the Basel III guidance is to increase bank capital requirements and to introduce capital surcharges for G-SIFIs.[6] However, some economists warned in 2012 that the tighter Basel III capital regulation, which is primarily based on risk-weighted assets, may further negatively affect the stability of the financial system.[7][8]

The FSB and the BCBS are only policy research and development entities.[citation needed] They do not establish laws, regulations or rules for any financial institution directly. They merely act in an advisory or guidance capacity when it comes to non G-SIFIs. It is up to each country's specific lawmakers and regulators to enact whatever portions of the recommendations they deem appropriate for their own domestic systemically important banks (D-SIBs) or national SIFIs (N-SIFIs). Each country's internal financial regulators make their own determination of what is a SIFI. Once those regulators make that determination, they may set specific laws, regulations and rules that would apply to those entities.

Virtually every SIFI operates at the top level as a holding company made up of numerous subsidiaries. It is not unusual for the subsidiaries to number in the hundreds.[citation needed] Even though the uppermost holding company is located in the home country, where it is subject, at that level, to that home regulator, the subsidiaries may be organized and operating in several different countries. Each subsidiary is then subject to potential regulation by every country where it actually conducts business.

At present (and for the likely foreseeable future) there is no such thing as a global regulator.[citation needed] Likewise there is no such thing as global insolvency, global bankruptcy, or the legal requirement for a global bail out. Each legal entity is treated separately. Each country is responsible (in theory) for containing a financial crisis that starts in their country from spreading across borders. Looking up from a country prospective as to what is a SIFI may be different than when looking down on the entire globe and attempting to determine what entities are significant. The FSB hired Mark Carney to write the report that coined the term G-SIFI for this reason in 2011.

  1. ^ "Addressing SIFIs". www.fsb.org. Archived from the original on 23 December 2015. Retrieved 31 July 2023.
  2. ^ Moenninghoff, S. C.; Ongena, S.; Wieandt, A. (22 January 2015). "The Perennial Challenge to Abolish Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks". pp. 10, 11, 28. SSRN 2440613.
  3. ^ Jenkins, Patrick; Davies, Paul (30 November 2009). "Thirty groups on systemic risk list". Financial Times.
  4. ^ "G20 to press ahead with plans for two-tier bank risk rating". Financial Times. 10 November 2010.
  5. ^ Financial Stability Board (November 2011). "List of Systemically Important Financial Institutions" (PDF).
  6. ^ BCBS (November 2011). "Global systemically important banks: Assessment methodology and the additional loss absorbency requirement – final document". BIS.
  7. ^ Slovik, Patrick (February 2012). "OECD study on regulation of systemically important banks". OECD Economics Department Working Papers. OECD. doi:10.1787/5kg0ps8cq8q6-en. {{cite journal}}: Cite journal requires |journal= (help)
  8. ^ Slovik, Patrick (February 2012). "Abstract: Systemically Important Banks and Capital Regulation Challenges". OECD Economics Department Working Papers. St. Louis: Research Division of the Federal Reserve Bank (RePec).